Wellington tenants hesitant about the future
Occupier demand in the Wellington office market has resulted in vacancy levels falling but uncertainty surrounding seismic issues and government changes continue to hamper the market, says JLL Research in its latest Pulse report.
“Despite this, there is investor interest in anticipation of market improvements,” the report says.
While leasing activity has fallen, demand for quality space in the Wellington office market remains high and occupier demand for prime space in the CBD has led to positive absorption overall. Tenants remain hesitant of future conditions which is taking its toll on transactions versus volumes. Several completed refurbishments have boosted absorption in the secondary office space.
With occupiers moving into the CBD precincts, as well as some tenants moving up the grades has left the Te Aro region flat, with vacancy moving slightly higher by 10 basis points.
The CBD Core contributed to the majority of the decline in vacancy, with space being absorbed by occupiers. Thorndon saw the return of Shamrock House, which is currently occupied by ACC while Freyberg House is currently being fitted out as temporary accommodation for the Ministry of Health.
Wellington CBD Prime Total Return – Last 12 months
Total supply within the Wellington Office market has moved lower with several properties being taken into remediation and seismic works over the period, including 57 Courtenay Place and Freyberg House.
The building at 57 Manners Street was removed from the office stock base as it has been designated for an apartment redevelopment. However these refurbishment works have been offset by stock being released back into the market including 47 Tory Street and 81 Molesworth Street.
The redevelopment of 15 Stout Street has been completed with the Ministry of Business, Innovation and Employment now filtering into the 19,630 sqm building for an initial 12 year term. Argosy Property has also started works on the $40 million refurbishment of the NZ Post building on Waterloo Quay. It will completely refit the 13 level, 25,000 sqm building and is expected to be completed by the end of 2015.
While new development on the ground remains thin, a number of proposed projects are being looked at. Site 10 on the Wellington waterfront has been selected as a potential office building, which is expected to comprise of 4.5 levels of A-grade space with large floor plates in excess of 2000 sq m.
With prime vacancy remaining at low levels and tenants eager to secure space, rents for Grade A space have drifted slightly higher over the first half of this year. Strong rental movements are expected in the near future given that space remains limited and the development pipeline remains static.
Investment activity in Wellington’s office market has seen a strong upward movement, with a number of assets transacting over the period. Confidence has been reignited for Prime assets with several better quality properties having sold over the first half of 2014. Private investors and unlisted property companies have been quick to snap up buildings in light of better office performance.
Transaction volumes for properties larger than $5 million have seen a strong increase and remain near historic highs last seen before the recession. The majority of transactions have remained within our yield ranges, but it is expected that Prime properties will continue to see further compression, with Secondary continuing to lag behind.
With the government continuing its office centralisation, landlords across the market are beginning to trigger remediation works in order to meet the next phase of market supply. While several landlords are set to benefit from the government movements, this is likely to drive vacancy higher over the medium term as the Crown continues to shrink its overall office footprint, affecting primarily the lower graded stock.
“We predict that this could push overall vacancy into the mid-teens by 2019,” JLL Research says.
The Pulse report urges occupiers and tenants to take advantage of the still low demand and increased uncertainty over government intentions to negotiate better incentives on both new and existing lease contracts.
Owners and landlords are advised to renovate and improve buildings in time for a pickup in demand at the upper end.
We have also seen the start of some conversion works in the lower grades of the office market, which is expected to increase over the medium term as obsolescence and demand for alternative uses begin to impact the market.